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Delivered by Bryan Emerson, President, Starlight Capital, www.starlightcapital.co on August 26, 2022
To a group of Argentine and Brazilian entrepreneurs assembled by Sergio Cuzmai.
Summary:
1. Make a good first impression by advanced preparation that investors expect
2. Research and approach appropriate capital sources for your industry and stage of development
3. Interview well
4. Be attentive and knowledgeable in negotiations
PRESENTATION
Hello, I am Bryan Emerson, President of Starlight Capital in the US. Thank you, Sergio, for inviting me to speak. I attended your last event and found it very informative.
For 22 years, I have been an investment banker who simultaneously ran an angel investment group. My comments today are based on four categories of the best and worst practices of entrepreneurs seeking investment that I have seen during those two decades.
Previous to that career, I worked in the telecom industry, for three years in Mexico City, where several friends and I had rolled up 6 small telecom companies into a public shell.
Feel free to raise your hand anytime that you have questions or comments.
1. You only have one chance to make a good first impression.
Investors are unimpressed by entrepreneurs who seem to be making it up as they go along or who have an idea but have done little to advance it but hope someone will fund them anyway.
First impression mistakes include:
*Not being incorporated in an investor friendly state or country so that the investors’ rights are protected. In the US, DE and NV are the most common states for this because they are shareholder friendly. In terms of countries, some, like Brazil, do not allow foreign majority ownership which may deter some large investors that like to take majority control. Look into Argentina’s laws for foreign investors.
* No logical financial model. Investors want to see that you have profit and loss statements, balance sheets, and are able to answer questions about what you have accomplished with money so far and what your use of funds will be if they invest. They want to see that their money is used to make more money or make more widgets to make more money, not go to fancy offices and expense accounts.
*Negative internet records about you or your company, such as bankruptcies, litigation, complaints, contradictions in resumes, or lack of relevant experience. Investors will research you and your company. In Latin America, many private companies are staffed with family members because the leaders trust them the most. In the US however, many companies have policies against nepotism, because they believe that this leads to relatives put in positions for which they are not qualified. So make sure that your staff resumes are as strong as yours, or put extra effort into training those people.
* No skin in the game. If you have not invested your own money in the company, have not put in the time to develop proof of concept, prototype, market analysis, or first customers, but just have an idea on paper and want someone to fund it, you should turn to your family and friends rather than professional investors or angel investors that you do not know. They will likely turn you down as greedy or naïve, and not capable of running the company.
The last mistake I will mention is:
* No money set aside to pay attorneys, accountants, and perhaps other professionals, such as business writers. For this, ask about fees in advance. When you do attract the attention of investors, you will want a professional looking out for your interests by researching the investors, reading the fine print, developing the financial reports that the investors asks for, and developing a business plan and other documents. Never accept an investment without professional advice and support.
Example: A man who talked with me about our conferences really wanted to change the world with socially responsible investments of about a billion dollars. He had an impressive PPT, but no details. Who puts the money in? How will he find them? How is the money deployed? How and when do the investors get a return? The company did not exist except in his lengthy PPT. Despite his lofty goals, he could not pay service fees to engage professionals to develop his idea or to meet investors that he did not know.
RESULTS
What are the results of these mistakes? These entrepreneurs will either not be taken seriously or will be taken advantage of. Investors evaluate hundreds of stronger deals with well-prepared entrepreneurs every year. Alternatively, unscrupulous vulture investors may make an offer with tricky elements in the contract to take advantage of your great idea and business naiveté in order to shut you down because they favor a competitor or to buy your whole company for a peso because you fail to meet some exorbitant milestone that you neglected to notice in the contract.
WHAT TO DO to enhance your first impression?
· Demonstrate commitment with your own time and money to convey that you are both a visionary and a committed leader. Show that you understand the investors’ expectations and that you respect their industry knowledge.
· Know your market potential, competition, competitive advantages, and weaknesses. You may seek investors whose team can shore up your weaknesses with their expertise, such as supplier contacts in cheaper locations.
· Showcase your expertise in speeches, white papers, testimonials, industry association memberships, press releases, etc so that you look impressive when they research you.
· Enhance your resume, and those of your staff, with additional credentials to build credibility in your industry
· Scrutinize your staff resumes and internet reputations. Are they the team that you want investors to assess? Any weak links?
2. The second common mistake is a poor outreach strategy to reach investors
· No targeting: Blank, general emails to info @ capital source where you know no one.
· No due diligence: Not fitting their investment criteria. Many investors’ websites have a full section outlining their investment criteria, such as geographic limits, industry segments, stage of company development, monetary range, and debt or equity investments. They list this info to invite appropriate opportunities and shut out inappropriate ones. They will also list their portfolio companies. It would be fruitless to offer your restaurant opportunity in Buenos Aires to an investor whose site specializes in oil rigs for Alaska.
· If you seek less than $1 mm, do not approach professional investment firms. You are too small.
· The last mistake I will mention in investor outreach is not utilizing your own network for personal introductions to investors and just sitting at home, waiting for the phone to ring.
· Example: Several people, from the US and Latin America spoke with me months after they presented at my investor conferences. They said that they had heard from no investors. I asked, “What do you mean “heard from?” I gave you the database of everyone who registered so you could email and call them to assess their interest, criticisms, suggestions, and to set up meetings. Did you?” No. To my surprise, each year, there are some people who pay good money to present their business very efficiently to dozens of investors at one time, but never follow up, despite the contact information I provide and recommendations for best procedures in contacting them. Instead, they hoped that investors would call them.
RESULTS
You will get no response.
WHAT TO DO
· Find ways to network with and get introductions to capital sources for your industry. Ask your banker, accountant, university alumni group. Join groups online and in person that support your industry and entrepreneurship. Start to develop a contact list that includes notes about who knows whom and when you spoke. Build the trust and respect of others by helping them, too, with referrals.
· If you want less than $1 mm, research websites of angel Investor groups, not professional investment firms. Many have names that identify their city or state, like Washington DC Angels or New Jersey Angel Group. In the US, venture capital research indicates that about 20% of companies that present to angel investors get funded, usually less than $400,000 per individual.
· You can also research LinkedIn with keywords for your industry plus investors. An extra feature that LinkedIn offers is called Sales Navigator. It is free for the first month, so you can try it out. It allows you to search for companies, job titles, locations, with much greater specificity.
Does this take time? Yes. Trying to reach investors will take time away from running your business. So assess whether it is better to grow organically to a certain stage of development first, when, perhaps you can hire help, or to approach investors earlier. Certainly the stronger your company, the better deal you can negotiate with investors. Early stage money is the most expensive to the entrepreneur because it is the riskiest to the financier.
3. The third mistake category is ways to fail in the interview or presentation when you do get an appointment with an appropriate investor.
· Participating as though the meeting is a long monologue. This should be a dialogue, because any investment will be a partnership.
· If you do not understand the investor’s question, do not rattle on about something else. Ask for clarification.
· Taking so long to answer one question that there is no time for them to ask all the others you should hear and answer.
· Not respecting their time and constraints on the meeting. For example, if they are interacting on a smart phone or in the car, your tiny PPT text will be useless.
· Not asking for feedback or questions, criticisms and suggestions
· Not asking about follow up. When should you call them again? What else do they want to hear or see?
· Only taking and not giving in the meeting.
· Overstating a pre money valuation that undervalues what the investor can offer in terms of both money, and often, industry expertise and contacts.
· Not knowing whether you want equity or debt investment. Equity is a long term partner who owns part of your company. Debt is a short term loan that you have to pay out of profits.
· EXAMPLE : A man wanted to raise a fund to buy real estate that he would then sell to put into other endeavors. When he appeared at my investor conferences, he was unprepared with a video, so he spoke live, rambled, went off point, and addressed no key points, like financial projections or his background for success. He came across as a very nice, sincere person, but not investment worthy.
RESULTS
*Your “out of tune” behavior may put them off. They may not like or respect you.
* They may not get the answers that they want to hear.
You will not get the feedback you should hear, even if it is negative.
*They may infer that you cannot answer tough but fair questions.
*They may feel that you undervalue the contribution of early money, without which you cannot launch.
*You may appear to underestimate the number of early companies that fail, and the risk that the investor takes with each portfolio company.
* Long winded entrepreneurs who monologue and ask for no feedback may leave the meeting thinking they did a great job and will get a check on Monday. Often, these are the ones who do not keep pounding the pavement, rejection, after rejection, to find the right investor. Hint: there is nothing wrong with competitive bids.
WHAT CAN YOU DO
· By networking, you can get a referral to an investor who will take your call or meeting. Be sure to thank that person, give them feedback on the meeting, and help that source in some way.
· Practice short answers to logical questions in advance of any meeting
· Invite other questions and feedback that indicate that you respect their level of knowledge and realize that any investment will be a partnership. Their responses will help you realistically assess their degree of interest
· Demonstrate respect for the investor’s risk in investing money by talking about how it is protected, paid, etc. Escrow account, quarterly payments or reports, etc
· Ask about follow up. Do they want to see more details? In what format and by email or in person? Do they want to see the prototype or detailed financials? Etc
· Send a thank you note to all who attended. Include some personal comment about their good question or sage advice.
· Even if you get a LOI, continue to speak with other investors. Many deals fall through.
4. Ways to fail in the negotiations of a LOI or investment contract
- Presenting a pre-money valuation that is way too high
- Offering too little equity for an investment without which you cannot launch or achieve an important milestone of growth
- Not knowing if you can repay a debt investment, on time, with interest
- Not knowing the general criteria of an equity investment
- Not reading or understanding the fine print
- Not being represented by a business or securities attorney
- Not understanding whether the money will be paid up front or paid in tranches, upon certain achievements, like increasing sales by x% or increasing profits by x %.
- Believing what they said without noticing key differences in the contract
EXAMPLE: a man in the cannabis industry with a little public company wanted to raise $40 mm, at a $1/share when his stock was trading at 29 cts/share, and declined to 6 cts. Of course, no one invested.
RESULTS
· Some offers are insulting to the investor or insulting to you.
· Some offers will be too little for you to achieve what you need to avoid failure
· If you cannot pay the debt or reach the contractual milestones, you can lose the company to that investor, or he/she can withdraw from the contract
WHAT TO DO
· Know the norms for valuations, debt interest rates, and equity investment deals.
· Contact some of the portfolio companies of this investor to ascertain their satisfaction with their deal (the details of which they will probably not disclose).
· Run best and worst cash flow scenarios to pay debt financing
· Negotiate the milestone/tranche components if the milestones are unreasonable
· Engage an attorney to review the contract
· Early on, research the reputation of the investor. Some people who pose as investors are really service providers who will charge you for their services. Others intentionally offer misleading contracts to naïve entrepreneurs.
In conclusion, successful entrepreneurship is challenging. So is securing investment or loans. Being prepared to make a good first impression, researching appropriate capital sources, interviewing well and be attentive and knowledgeable during negotiations will elevate your chances of success.
Written by Laura Emerson, Laura@starlightcapital.co
For Bryan Emerson, President, emersonb@starlightcapital.co, +1 907 795 5586 (WhatsApp/cell)